A parent-subsidiary relationship is created between two companies when one holds a controlling interest in the other. One parent company can establish several subsidiaries, all under its control. Companies with multiple subsidiaries and no primary business activities of their own are also known as holding companies. A parent company can create a new subsidiary from within or take over a controlling interest in an existing company. There are several reasons for a company to have subsidiaries

Brand Recognition

A company may organize subsidiaries to keep its brand identities separate. This allows each brand to maintain its established goodwill with customers and vendor relationships. Subsidiaries are often used in acquisitions where the acquiring company intends to keep the target company's name and culture. Becoming part of the parent company can make customers and investors wary that more changes are on the horizon. Subsidiaries can also help you position part of your business as an alternative to the parent company at a different price point. This strategy will not work if customers think both companies are too closely related.

Financial Considerations

The entire organization may be able to save on its taxes if the parent company owns over 80 percent of one or more subsidiaries. The parent can file a consolidated tax return and use a losses from a failing subsidiary to offset income from other subsidiaries. Keeping each company separate allows the parent company to sell unprofitable subsidiaries without disrupting its own business activities. Because the assets of each subsidiary are also separate, the reach of creditors is limited to only the subsidiary that signed the contract with that particular creditor.

Raising Capital

A subsidiary also allows you to offer stock in a portion of the company without affecting the parent company's stock price. For example, startups often hold initial public offerings to raise funds for the company and cash out some of the founders' personal investment. This is more difficult for an established company that needs capital for a new venture. In this case, it may be better to spin the new venture off into its own subsidiary and take that subsidiary public. Only the subsidiary that benefits from the invested capital must offer equity to outside investors.

Reporting and Disclosure Issues

The parent company can choose which areas of its business should be public and which should be private. Not all business operations are suitable for public investment and disclosure requirements. For example, support functions are hard to quantify, so investors may not get excited enough to buy stock. The company may also want to avoid Securities and Exchange Commission reporting for certain segments of the business, especially when starting a new product line. Keeping these activities in a privately held subsidiary makes it more difficult for competitors to uncover information you are not ready to release yet.

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About the Author

Denise Sullivan has been writing professionally for more than five years after a long career in business. She has been published on Yahoo! Voices and other publications. Her areas of expertise are business, law, gaming, home renovations, gardening, sports and exercise.